Industry energy support and its interaction with EU ETS

The study compares four possible forms of support measures—a production subsidy, lower energy taxes, lower electricity costs, and subsidies for carbon reduction technologies—and examines what would happen if the Netherlands, Germany, and France jointly provide support to their energy-intensive industries for five years. An economic model is used to calculate what this would mean for competitiveness and emissions in these countries, in the rest of Europe, and globally. 

This study explicitly takes into account the EU ETS as it is currently designed. Due to the so-called Market Stability Reserve (MSR) within the EU ETS, the European emissions cap is no longer fixed. As a result, changes in emissions due to national (climate) policy actually lead to an increase or decrease in total emissions in the EU.

Improved competitiveness of the industry

Measures that directly reduce production costs—such as production subsidies, lower electricity costs, or lower energy costs—improve companies’ competitive position, leading them to increase production. Subsidies for clean technologies (such as the SDE++), on the other hand, do little to improve the competitive position.

Effects on emissions

The role of the current ETS is important. A subsidy for clean technologies reduces emissions because allowances are removed from the market via the MSR. The other support measures aimed at reducing production costs have the opposite effect and actually increase emissions and the number of allowances. This effect is largest when energy costs are reduced, because fossil fuels become cheaper. Reducing electricity costs makes industrial production cleaner, but increases emissions from electricity generation, which on balance leads to an increase in emission allowances. The increase in emission allowances is smallest when there is a general reduction in production costs. At the same time, global emissions may decrease, because relatively clean European production replaces more polluting production outside Europe.

Implementation

Due to European state aid rules, a production subsidy is difficult to implement, whereas reducing electricity costs is more feasible. Subsidies for clean technologies can complement support aimed at improving competitiveness and help achieve climate goals.